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Software tax exemption likely to return

Last year’s repeal of a tax exemption on downloadable software is likely to go back on the books this summer, the result of the budget deal struck by the Senate and House and contained in House Bill 11-1293.

The tax exemption bill was heard in the House Economic and Business Development Committee Tuesday, and passed 9-4, with support from two of the committee’s Democrats.

The bill passed the full House on a 57-7 vote Thursday.

Under HB 1293, software that is downloadable, custom software, or software installed on a computer by a vendor representative would be exempt from tax. Software that is taxed under HB 1293 includes prepackaged software or governed by a “tear-open” license agreement.

The bill would cost the state about $21.6 million in the 2011-12 budget, and about $25 million the following year, according to estimates from the Department of Revenue. However, industry representatives disputed those figures Tuesday.

The exemption originated in rule-making from the Department of Revenue during the administration of Gov. Bill Owens. Special Regulation 7 (SR-7) created “clear tax law on tangible software with tangible guidelines,” according to an industry fact sheet provided by House Republicans.

Last year, HB 10-1192, part of the dozen tax exemption and credit bills passed by the General Assembly, lifted the SR-7 exemption on downloadable software.

Prior to Tuesday’s committee hearing, House Majority Leader Amy Stephens, R-Monument, a sponsor of HB 1293, held a press conference with industry representatives who talked about the uncertainty and confusion caused with the pass of last year’s bill, HB 10-1192. “Colorado is number three in software, but there’s zero reason we can’t be number one,” Stephens said. The tax imposed by HB 1192 “is one of the major impediments to us being number one. … We have got to start protecting entrepreneurship, so that small business can grow” and not be strangled by regulation. “This bill speaks to that kind of oppression,” she said.

The tax imposed under HB 1192 created “confusion and uncertainty due to unclear tax guidelines,” according to Su Hawk, president of the Colorado Technology Association (CSIA). Hawk also said that people who call the Department of Revenue regarding the tax often get different answers to the same questions.

HB 1192 taxed every business that uses computer software, said Hawk. The imposition of HB 1192 “put us in the bottom two states for competitiveness,” noting that Colorado and Massachusetts also have this tax, she said. Although the state sales tax is 2.9 percent, she explained, because Colorado is a home-rule state, local governments also impose their own sales and use taxes, and the total now reaches as much as 8 percent.

Texas also imposes that tax, according to tax attorney Bill Mueldener of Hein and Associates. According to the Texas Taxes website, that tax has been in place since at least 1997. And at 8.25 percent, also a combination of state and local taxes, the Texas tax rate is higher than Colorado’s.

The tax from HB 1192 was supposed to generate $24 million in revenue for the state in 2010-11, but Stephens maintained the actual amount collected so far is only $2.7 million. And even that amount is questionable, because the department does not distinguish between revenue on downloadable software versus prepackaged software, according to Stephens. “We’ve yet to see any of that [revenue] materialize. The Department of Revenue cannot give us” exact figures,” Stephens said. But the department couldn’t provide exact figures on how much tax the state collected on software sales that came from SR-7, Hawk said. “Nobody tracks that.”

That was confirmed by Phil Horowitz of the Department of Revenue, who told the business committee that use taxes are up during the past year, and while the economy has improved in that time, there’s no way to know where those taxes are coming from.

Hawk also claimed that HB 1192 hurt the industry by forcing companies that might have come to Colorado to go elsewhere. She repeatedly cited Utah as a place where those jobs and investments have gone.

“We have lost major companies,” Hawk said, citing First Data and the IT department of Qwest, and “we are causing them to turn away,” she said. Colorado Springs lost a data center to Austin because of HB 1192, she said, and a major employer in the Denver Tech Center moved their data center went to Wyoming, and other companies have gone to Atlanta and Utah.

“Our reputation has been tarnished,” Hawk told the committee. “Confusion chills. The confusion caused by HB 1192 will cause companies to go elsewhere…[Colorado’s] competitiveness is very fragile.” The software and technology industry care passionately about Colorado and contributing to Colorado, Hawk said. It’s “not about paying taxes, it’s about clarifying it so that they can run their businesses.”

CIO Micki Nelson of MWH, a global environmental engineering company, told the committee that the company is being courted by data centers in other states that she said don’t have this tax, but she cited as her only example Texas, which does have the tax. “This new tax has been very bad for MWH and for Colorado,” and said that if she moved her data center elsewhere, the state would lose not only sales and use tax and income tax from the personnel.

“Some laws just don’t make sense,” and taxing software from the Internet is one of them, Mueldener told the committee. Colorado is a difficult state in which to administer sales and use tax, he said, and that while the state sales tax is low, the complexity comes from adding in home rule and special district taxes.

The bill also got support from two of the committee’s Democrats, including Rep. Roger Wilson, D-Glenwood Springs, a software engineer.

Ali Mickelson of the Colorado Fiscal Policy Institute was the lone witness opposing HB 1293. She told the committee that the revenue from last year’s bill would help offset the cuts in the state budget. “Now is not the time to repeal a measure that has produced revenue that offset cuts in essential community services.” She also said there was no evidence that the SR-7 exemption had increased employment or stimulated the economy, but that the revenue from HB 1192 had helped support schools, roads and communities.

In casting his “no” vote, Rep. Max Tyler, D-Lakewood, said he was voting against the bill in support of the 450 teachers who would lose their jobs as a result of the revenue lost from HB 1293.

While CSIA and its members testified to the problems caused by the 2010 legislation, the association’s website tells a different story.

In an October, 2010 press release, Hawk said that “the hardware, software and IT services industry is one of the largest industries in Colorado with more than 5,500 companies and 175,000 individuals. We are so proud that in Colorado, we have an exponential number of successful technology companies, corporations, regional operations, and entrepreneurs, who all lead us in innovation and success. However, as a state, we have been quiet about all this growth, and perhaps it was because people preferred to focus on success instead of the spotlight, or, simply because we hadn’t aggregated the information…”

The job of the association’s website is to promote the industry and its positive aspects, Hawk said Wednesday, while privately advocating for changes, including legislative changes, that will resolve problems such as HB 1192.

Stephens told The Colorado Statesman Wednesday that the issue is when a company is looking for a location they look at the entire business climate, not just taxes. Texas and Utah offer incentives that Colorado cannot offer, she said, and Texas doesn’t have property taxes, so while the software tax may be higher, the total tax bill will be lower.

HB 1293 is the second bill in the budget package that would repeal 2010 legislation on tax exemptions. The other, HB 1005, would repeal a 2010 law that lifted an exemption on agricultural compounds, such as pharmaceuticals, bull semen and pesticides. That bill passed the House with token Democratic opposition on Monday and is scheduled for a hearing in the Senate Finance Committee next week.

These two tax repeals “have the most immediate impact on jobs and the economy, and the ability to stop any confusion about tax laws,” Stephens said Wednesday. “We want to settle that question. When people sense uncertainty, and there’s ambiguity in the tax law, they won’t sign that contract” to come to Colorado until the confusion is resolved, she said.